Microsoft doesn't want to admit it, but a Gartner analyst says the vendor's decision to offer Windows Server instances in the Azure cloud is opening a new competitive front against partner hosting companies.

Before 2010 is over, Microsoft will update Windows Azure with the ability to run Windows Server 2008 R2 instances in the Microsoft cloud service. The move could blur the lines between platform-as-a-service (PaaS) clouds like Azure, which provide abstracted tools to application developers, and infrastructure-as-a-service (IaaS) clouds such as Amazon's EC2, which provide raw access to compute and storage capacity.

This move also improves Microsoft's competitive stance against VMware, which is teaming with hosting companies to offer PaaS developer tools and VMware-based infrastructure clouds.

But the cloud-based Windows Server instances open up a new competitive front against Rackspace and other Web hosters who are Microsoft partners, according to Gartner analyst Neil MacDonald.

Microsoft has, to some extent, downplayed the new capabilities, saying the cloud-based Windows Server - which goes under the name Windows Azure Virtual Machine Role - is primarily an on-ramp to port some applications to the Azure cloud.

"What they really want is people using Azure," MacDonald says. At the same time, VM Role "is a form of infrastructure-as-a-service," he continues. "The reason Microsoft is being so vague is they really don't want to upset their ecosystem partners, all the hosters out there in the world making good money hosting Windows workloads. Microsoft doesn't really want to emphasize that it is competing against them."

Whereas IaaS clouds provide access to raw compute power, in the form of virtual machines, and storage that is consumed by those VMs, PaaS clouds provide what could be described as a layer of middleware on top of the infrastructure layer. Developers using PaaS are given abstracted tools to build applications without having to manage the underlying infrastructure, but have less control over the basic computing and storage resources. With Azure, developers can use programming languages .Net, PHP, Ruby, Python or Java, and the development tools Visual Studio and Eclipse.

Microsoft officials have previously predicted that the lines between PaaS and IaaS clouds will blur over time, but stress that Windows Azure will remain a developer platform.

In response to MacDonald's comment, Windows Azure general manager Doug Hauger says "our partners provide a vast range of services to customers for hosting an infrastructure-as-a-service [cloud]. The VM Role does not compete with them in this space."

For what it's worth, Rackspace does view Microsoft as a cloud competitor. "The cloud market is going to be huge and there are many ways to win in it," Rackspace President Lew Moorman says. "Microsoft is serious about the market and we view them as an emerging competitor as well as partner. We are confident that our service difference will resonate to a large part of the market regardless of the technical offers that emerge from players such as Microsoft."

In an interview this week, Hauger discussed both the similarities and differences between Microsoft's cloud-based Windows Server instances and the virtual machine hosting provided by Amazon and other IaaS vendors.

"I think there is an incredibly broad, gray line between infrastructure-as-a-service pure-play and platform-as-a-service," Hauger says.

Ultimately, the marketplace will only care about the technical capabilities of cloud services, not the taxonomies used to define them, Hauger continues. With VM Role, Azure customers will have to manage and patch their own guest operating system. This is clearly different from pure PaaS, in which developers write to endpoints and services through an API, and are "abstracted from even worrying about the operating system," Hauger says.

But VM Role, when it becomes available later in 2010, will still have some of the developer tools and other benefits of PaaS, so "it's not the ground floor of infrastructure-as-a-service," Hauger says. "You're taking the elevator up a little bit."

Even though Microsoft is offering VM hosting, that does not mean customers will be able to create custom compute and storage configurations, as they might with an IaaS provider like Rackspace, Hauger says.

Custom storage configurations are "something we absolutely do not offer with the Windows Azure platform, because we've made an architectural decision to have a uniform storage pool."

On the other hand, Azure customers don't have to worry about writing multi-tenancy capabilities into their applications. Hauger argues that building applications that are resilient, scalable and automated is, while not impossible in an IaaS cloud, quite difficult when "you're staring down the throat of a VM and you have to manage that yourself."

Even with VM Role, and a Server Application Virtualization option that will let developers transfer application images to Azure, Hauger does not recommend that customers "forklift a big, monolithic application from on-premise and move it over to Windows Azure."

VM Role could be used to move some "lightweight" HPC applications to the Azure cloud, Hauger says. If a customer needs large-scale data analysis, but only for a short amount of time, it makes sense to move that app to Azure temporarily and then take it back in-house, he says. Some customers are finding that purely Web-based applications, like Facebook games, also make sense for Azure, he says.

Microsoft officials are willing to admit that Azure's capabilities are not limitless.

For example, Microsoft CTO Barry Briggs says his own team used Azure last year to build a charity auction application, but kept credit card processing on-premise "because PCI compliance is a big deal."

"There are some things that will probably stay on-premise for a while and I suspect PCI compliance will be there, because customers want to take some time to understand what the capabilities and potentials of the [cloud] technology really are," Briggs says.

Although Microsoft is expanding Azure by offering VM hosting, it's important to note that the offer applies only to Windows Server 2008 R2. Microsoft clearly wouldn't offer Linux VMs and offering older versions of Windows Server would not fit the Microsoft strategy, either, MacDonald says.

Although Amazon does offer a billing service, load balancing, databases and a variety of other tools designed for developers, Amazon has not made any significant moves into PaaS, MacDonald says. Amazon says its approach prevents customers from "being locked into a particular programming model, language or operating system."

But Microsoft's Windows Server hosting does put the two companies into more direct competition, MacDonald says.

Perhaps most crucially for Microsoft, the VM Role service gives CEO Steve Ballmer and his cloud team a more viable way of competing against VMware, which has partnerships designed to provide both PaaS offerings and the VM hosting capabilities needed to move applications to the cloud.

"The customers need to have an easier on-ramp to cloud computing, and Microsoft wasn't providing that and their biggest competitor was," MacDonald says. "This was a gap they had to fill and I'm glad to see they've done it. I'd say it's two years late. It doesn't mean they're too late, but they should have done this from day one."

As for the Web hosters who now find themselves in competition against Microsoft, MacDonald says they will simply "have to evolve."